Everything seemed fine at Southwest Airlines. They were a top three carrier with fierce customer loyalty. From a consumer standpoint, the user experience was modern, and their mobile app and website were easy to use.
But during the final 10 days of 2022, all of that was put at risk with the largest service meltdown in airline history. Southwest canceled more than 16,000 flights, some due to bad weather but most due to a series of technical and logistical failures as it tried to return to normal operations. Many customers were stranded for days during this heavy travel period. Regulators and legislators are investigating the incident.
Southwest had a problem to which many banks can relate: They invested many millions of dollars to create pleasing digital customer experiences, but kicked the can down the road in updating their behind-the-scenes technology because it was difficult and expensive. Combined with a highly complex route system, the old technology was inflexible and slow to make changes.
Banks, who prize reliability over speed and change, commonly use core banking and payments platforms that can be more than 40 years old. In the world of IT, this leads to what’s known as “technical debt” – choosing a solution that’s easy now and delaying the investment to bring technology up to standard.
While user experience is often the most visible example of technical debt, it is often back-end technology that causes the most difficulty in upgrading. The experience of other industries can help us understand the types of risks that banks face by ignoring technical debt – these include loss of potential growth, lower customer loyalty, inability to adapt to change and heightened regulatory scrutiny.
The loss of potential growth can be hard to recognize, but this is potentially most relevant for banks. After all, you can still grow while missing opportunity. Is there a reason why fintechs are launching more innovative products than banks? While they have the advantage of less regulatory scrutiny, fintechs often just serve more niche markets (particularly younger customers) and make it faster and easier to open accounts or engage in commerce. Both can be addressed by being able to innovate more quickly.
Even fast innovators in banking measure product cycles in months and quarters rather than days and weeks. That means banks only invest in the products and segments that are highly likely to pay off. Nobody wants to risk a year or two of institutional focus and investment on a small or unproven segment. While banks will never take the “move fast and break things” ethos of Silicon Valley, technology should not be the reason they cannot compete.Banks should prioritize three main areas:
Look for areas of rigidity: Inflexibility is the enemy of innovation. It slows down change and requires more extensive work to fix problems. Rigid systems mean anything that is not already preprogrammed will take a long time to change, if it’s possible at all.
Follow the interactions: Start with things that will impact customer interaction. Obviously, bankers have spent the last decade improving online and mobile interactions, but that should extend to platforms, too. People log in to their mobile banking app occasionally, but they use payment products multiple times a day, suggesting banks should prioritize this over ripping out a core banking system.
Focus on better experiences. This is not just about a better mobile app or moving a service experience onto digital channels. Tech companies have shown that great experiences predict needs, provide visibility, empower consumers and communicate in real time.
Investing in technical debt, particularly for back-end technology, can be intimidating. Migrations can be time-consuming, have an impact on customers and take institutional focus away from other initiatives. As we’ve learned from Southwest Airlines, there is a hidden cost to maintaining legacy infrastructure. Not only do banks miss out on growth opportunities and potentially damage customer loyalty, these older systems cost millions of dollars each year to maintain.
Banks are among the most trusted institutions in America, but increasingly consumers are looking elsewhere to have their financial needs met. Banks are in a unique position to retain that trust and deliver the innovative products and experiences that consumers seek by modernizing their technology.
Gary Singh is president of Zeta Services
